contentious commentary - clifford chance

Contentious CommentaryHong Kong

© Clifford Chance, June 2016

Contentious CommentaryJune 2016

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Long-arm of the Law ......................................................................................................3

Snooze, you lose .............................................................................................................3

Quick off the mark ..........................................................................................................4

It’s an ex-Company…. ....................................................................................................4

Arbitration wins the day .................................................................................................5

Broken records ................................................................................................................5

Foreign Visitor .................................................................................................................6

Clearly a wind-up ............................................................................................................6

Poor service ....................................................................................................................7

Conspiracy of silence .....................................................................................................7

cont

ents


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Long-arm of the LawCombatting fraudulentschemes in overseas-listedsecurities The essentially territorial nature ofsecurities regulation in Hong Kongsometimes presents a challenge forregulators. In SFC v Young Bik Fung &Ors, HCMP 2575/2010, the SFC pursueda claim under section 300 Securities andFutures Ordinance to get round therestriction of the territorial application ofthe insider dealing provisions of theOrdinance. Two former solicitors atSlaughter & May and Linklaters werefound guilty of misuse of confidentialmaterial price sensitive information so asto benefit from share trading.

This information concerned StandardChartered Bank’s (SCB) tender offer in2006 for the shares of HsinchuInternational Bank Co Ltd, a corporationlisted on the Taiwan Stock Exchange. Asolicitor employed in private practice andseconded to SCB to work on the offerwas given access to confidential andprice sensitive information includingSCB’s decision to make a firm offer and

the price. Prior to the announcement ofthe tender offer, the solicitor tipped off herboyfriend and his two sisters to buyHsinchu shares, resulting in a profit ofHKD2.7 million.

Section 300 spells out the offence thatno person shall, directly or indirectly, ina transaction involving securities,futures contracts or leveraged foreignexchange trading:

(i) employ any device, scheme or artificewith intent to defraud or deceive; or

(ii) engage in any act, practice or courseof business which is fraudulent ordeceptive, or would operate as afraud or deception.

The Court found that the behaviourconstituted fraud or deception within themeaning of section 300.

While the Court accepted the defendants’argument that section 300 does not haveextra-territorial application, it held thatapplying section 300 to this case did notinvolve an extra-territorial application ofthe law, because the “deceptive orfraudulent scheme” caught by the section(ie. the plan put in place to buy the stocks)was “consummated” in Hong Kong.

The Court found an analogy with section9(2) of the Prevention of BriberyOrdinance, where, as the Court of Appealheld in HKSAR v Krieger [2014] 3 HKLRD404, “if the offer is made in Hong Kong itmatters not…that the offeree agent is apublic official of a place outside HongKong or that the act or forbearance inrespect of which the offer is madeconcerns duties outside Hong Kong.”

The Judgment includes cautionarycomments as to the nature andeffectiveness of the Chinese wallsthat Linklaters had in place, as one ofthe defendants did not actually work onthe deal.

Snooze, you loseDefence struck outafter failure to attend Pre-Trial ReviewThe Defendant in So Hung Kit v Tong KaiMan DCCJ 5116/2006 (ChineseJudgment) failed to turn up for a Pre-TrialReview (PTR) hearing. The Court orderedthe Defendant to submit, within 14 days,a written explanation for the absence andwhether he intended to defend the action,failing which the Defence would be struckout. The Court adjourned the PTR.The Plaintiff’s solicitors contacted theDefendant to inform him of the Order andalso published an advertisement givingthe date and time of the PTR. Despitethis, the Defendant failed to attendthe hearing.

The Court ordered the Defence be struckout and the Plaintiff granted defaultjudgment. The failure of the Defendant toprovide any reason for absence would initself allow the Court to grant the order.



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Quick off the markNeed for promptnessin applying for anti-suit injunctionThe Court in Sea Powerful II SpecialMaritime Enterprises (ENE) v Bank ofChina Ltd [2016] HKEC 90 dismissedthe Plaintiff’s application for an anti-suitinjunction to prevent a shipping disputebeing held in the Qingdao MaritimeCourt. The Plaintiff argued that anarbitration clause within the Bill ofLading should govern the dispute.

The Court rehearsed the generalprinciples that the courts “shouldordinarily grant an injunction to restrainthe pursuit of foreign proceedingsbrought in breach of an agreement forHong Kong arbitration, at any ratewhere the injunction has been soughtwithout delay and the foreignproceedings not too far advanced.”The Court found that the arbitrationclause had been validly incorporatedinto the Bill of Lading, but that thePlaintiff had been evading service of themainland proceedings waiting for thelimitation period to expire. The Plaintiff’sdelay was inordinate and culpable.

It’s an ex-Company….No derivative actionpossible on behalf ofdissolved companyThe Plaintiff in Chet Yuet Ying v WongChoi Hung [2016] HKEC 78 brought aderivative action on behalf of a companythat had long since been dissolved.A dissolved company ceases to exist as alegal entity and cannot itself sue or do anyother legal act unless it is restored to theCompanies Register. Since the companycould no longer sue the allegedwrongdoers, it followed that a derivativeaction could not be brought on its behalf.The Plaintiff had no derivative cause ofaction and further pursuit of such a claimwould be an abuse of the court’s process.

Biased – surely not! When a judge should remove himself from trialThe 1st Defendant in Komal Patel v Chris Au [2015] HKEC 2371 applied thatZervos J recuse himself from the proceedings on the basis of apparent bias.The test was “whether a reasonable, objective and informed person would onthe correct facts reasonably apprehend that the judge had not brought or willnot bring an impartial mind to bear on the adjudication of the case, that is, amind open to the evidence and the submissions of counsel…”.

The test looks at bias from the point of view of a fair-minded and well informedobserver. The grounds for recusal included factors such as the professionalrelationship of Zervos J’s brother with the brother of the 3rd plaintiff and hispersonal relationship with the 3rd plaintiff, an allegation that most of Zervos J’sdecisions in the proceedings had been against the defendants and thatZervos J had already made his mind up upon issues to be tried during the trialin favour of the Plaintiffs. Zervos J dismissed the application, the second timein recent weeks he had rejected accusations of apparent bias.

Zervos J also commented upon the written submissions presented to theCourt by the solicitor advocate in support of the application that were“unfortunately at times couched in extreme and inappropriate language [and]where in some instances submissions were made based on material that wasnot sourced or verified, or without substantiation”. It was “incumbent on asolicitor advocate to ensure that he or she adheres to the high standards ofprofessional conduct expected of an advocate before the courts.”


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Arbitration winsthe dayCourt considers whencourt proceedings shouldbe stayed in favourof arbitrationThe case of Bluegold Investment HoldingsLtd v Kwan Chun Fun Calvin [2016]HKEC 532 concerned the defendant’sapplication under section 20 of theArbitration Ordinance for a stay ofproceedings and a referral of the disputeto arbitration.

The Court summarised the approach tobe taken as a four stage test: (1) Is therean arbitration agreement between theparties? (2) is the clause in questioncapable of being performed? (3) Is therein reality a dispute or difference betweenthe parties? (4) Is the dispute or differencebetween the parties within the ambit ofthe arbitration agreement? The onus is onthe applicant to demonstrate there is aprima facie case that the parties arebound by an arbitration clause.

Citing the Court of Appeal’s decision inPCCW Global Ltd v InteractiveCommunications Service Ltd [2007]1 HKLRD 309, the Court ruled that unlessthe point is clear, the matter should bestayed in favour of arbitration. The Courtalso held that a non-exclusive jurisdictionclause referring to the jurisdiction of theHong Kong courts operated in parallelwith the arbitration clause in the sameagreement. The purpose of the clausewas to fix the supervisory court of thearbitration. The Court made an order tostay the proceedings in favour ofarbitration and ordered the plaintiff to paythe defendant’s costs of the summons onan indemnity basis.

Broken recordsInspection of companyrecords under theCompanies OrdinanceThe plaintiff in Hao Xiaoying v GreenValley Investment Limited [2016]HKCU 476 applied for inspection of thedefendant company’s records unders.740 of the Companies Ordinance, Cap622. The plaintiff was a 20% shareholderof the company. The Court said theapplicant must first establish that he isacting in good faith and second, thecourt must believe the circumstances aresuch that the inspection sought is for aproper purpose.

A wish to inspect documents toinvestigate a genuine and credible beliefthat there has been corporatemismanagement is capable ofconstituting a proper purpose. Wherethe court is satisfied the purpose isgermane to a shareholder’s economicinterest in the company, a properpurpose will have been satisfied.A shareholder is not entitled to embarkon a fishing expedition in search of acause of action to support a meresuspicion of wrongdoing. A shareholderhas no general right to access therecords of the company in order tochallenge the commercial decisions ofits management. Applying the tests, theCourt granted inspection of some of therecords sought.



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Foreign VisitorWhen mainland judgmentscan be set aside inHong KongIn what is believed to be the firstreported case under the MainlandJudgments (Reciprocal Enforcement)Ordinance (Cap 597) since itsintroduction in August 2008, the Courtof First Instance dismissed thedefendants’ application in吳作程 v 梁儷& Ors – [2016] HKCU 401 to set asidean order for registration of a MainlandJudgment in Hong Kong.

The 1st defendant defaulted on a loanagreement under which the 2nd to 5th

defendants were guarantors. Theplaintiff obtained a judgment from theShenzhen court ordering the defendantsto make payment by instalments (theMainland Judgment). The defendantsdefaulted on the payments and theShenzhen court issued the plaintiff witha certificate that the Mainland Judgmentwas final and enforceable in theMainland. The plaintiff obtained anorder from the Hong Kong court toregister the judgment in Hong Kong.The defendants applied to set asidethe order.

Referring to s. 5(2) of the Ordinance,the Court found that as the plaintiff hadproduced the necessary certificate,the defendants needed to prove to thesatisfaction of the Hong Kong courtwhy it should not register the MainlandJudgment. The defendants were ineffect asking the Hong Kong courtto conduct a mini-trial to assess themerits of its case, which was not therole of the court.

Clearly a wind-upCosts wherepetitioner withdrawswinding-up petitionHarris J considered the positionregarding costs where a petitionerwithdraws a petition to wind up acompany after receiving the company’sevidence in opposition. Givingjudgment in Re Sino Pacific Corp Ltd[2016] HKEC 548, he cited his earlierjudgment in Re Lucky Ford Industrial Ltd[2013] 3 HKLRD 550, in which he said

it was appropriate for costs to followthe event.

Having voluntarily offered to withdraw thepetition, it followed that the petitionershould pay the costs of the proceedings.A petitioner should assess in the firstinstance whether or not to issue a winding-up petition. If the assessment proves to beincorrect, and the petitioner laterrecognises that it should be dismissed, thepetitioner will have to pay the costs. On thefacts, the Court considered the issue of thepetition was a misuse of the winding-upprocedure and costs should be paid on anindemnity basis.


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Poor serviceStrict approach toapplications for leave toserve out of jurisdictionThe defendant in Newocean PetroleumCo Ltd v Rio Tinto Shipping (Asia) Pte Ltd[2016] HKEC 879 sought to dischargean earlier order granting leave to theplaintiff to issue and serve a concurrentwrit on the defendant in Singapore.Jurisdiction under RHC O. 11 isexorbitant in nature. “It is a strong thingfor the court to go outside its territoryand to compel a foreigner to come to

Hong Kong in order to defend itself.”The plaintiff had to demonstrate thateach of its claims fell within one of theheads of O 11, r1(1).

The plaintiff’s claim was brought underO 11, r1(1)(d), in which the claim wasbrought to enforce a contract made withinthe jurisdiction, made through an agent inthe jurisdiction, governed by Hong Konglaw or gave jurisdiction to the CFI througha term in the contract. The Courtaccepted the defendant’s claim that therewas never a contract between the parties.It was “difficult to see how (the defendant)could be contracting with (the plaintiff) not

just unknowingly, but contrary to its ownunderstanding.” Anthony Chan J set asidethe leave order.

Conspiracy ofsilenceHow strike-out principlesare applied toconspiracy claimsThe defendants in Ammolite Wealth Ltd vKing China Properties Ltd [2016] HKEC886 applied for an order that the plaintiff’sclaims be struck out and the actiondismissed on the grounds that the claimsdisclosed no reasonable cause of action,were frivolous or vexatious or wereotherwise an abuse of process. While thepower to strike out is exercised in “plainand obvious cases”, Master M Wong inChambers noted that “plain” is not thesame as simple and “obvious” is not thesame as short. “If the Statement of Claim,however complicated, shows that there isno cause of action a court will order it tobe struck out”.

When pleading the tort of conspiracy, thepleader must allege at least one overt actwhich is the act of all the allegedconspirators or failing that, a number ofovert acts which include at least one acton the part of each conspirator.The cause of action should be set outclearly in the pleadings and should notrequire inferences to be drawn. The Courtaccepted the defendants’ submission thatthere was no basis to suggest that thesole or predominant purpose was to injurethe plaintiff rather than to pursue theirown advantage. The Court ordered thatthe plaintiff’s claims based on conspiracyto injure be struck out.

Marriage not made in heaven Jail for husband, defeat for wife in court applicationIn related cases arising out of a failed marriage, the Court considered theappropriate sentence for contempt of court for breach of a Court order andwhether a party’s conduct should mean that an injunction should bedischarged. In Suzanne Ruth Henderson v Scott Henderson [2016] HKEC858, Queenie Au-Yeung J said that a prime consideration of the court insentencing contempt was to “signal importance of demonstrating to litigantsthat orders of the court are to be obeyed.” In the case of a Mareva injunction,deliberate breaches should be met with an immediate term of imprisonmentmeasured in months rather than weeks, although there may be circumstancesin which a substantial fine would be sufficient (eg. the contempt has beenpurged and the assets recovered). Here, the respondent had committeddeliberate breaches which had deprived the applicant and their children ofmaintenance monies. The Court imposed a three month sentence.

Meanwhile, the plaintiff wife in Suzanne Ruth Henderson v Scott Henderson[2016] HKEC 857 sought to continue a Mareva injunction in aid ofenforcement of maintenance orders obtained in Ontario under section 21MHigh Court Ordinance, Cap 4. The Court found she had committed a grossviolation of her obligations underlying the grant of a Mareva injunction throughmaterial non-disclosure, intentional misrepresentation and lying to the Courtwhen making the application. She also breached an undertaking not toinstitute proceedings without leave of the Hong Kong court by pursuingcontempt proceedings in Arizona. In the circumstances, the Court dischargedthe Mareva injunction and declined to regrant it.

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